A bank has an interest rate spread of 150 basis points on $30 million in earning assets funded by interest-bearing liabilities. However,the interest rate on its assets is fixed and the interest rate on its liabilities is variable. If all interest rates go up 50 basis points,the bank's new pretax net interest income will be ________.

Question

Quizplus · Accepted Answer

First, we need to calculate the current pretax net interest income:

$30,000,000 x 1.5% = $450,000

Now, we need to calculate the impact of the interest rate increase on the liabilities:

$30,000,000 x 0.5% = $150,000

Since the interest rate on the assets is fixed, it will not change. Therefore, the pretax net interest income after the interest rate increase will be:

$450,000 - $150,000 = $300,000

Therefore, the correct answer is C.

A Bank Has an Interest Rate Spread of 150 Basis